<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2000
Commission File Number: 0-23021
----------------
EDUTREK INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2255472
(I.R.S. Employer Identification No.)
(State or other jurisdiction
ofincorporation or organization)
500 Embassy Row, 6600 Peachtree
Dunwoody Road, Atlanta, Georgia
30328
(Address of principal executive (Zip Code)
offices)
404-965-8000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class A Common Stock, without par value 5,958,502 shares
Outstanding at October 31, 2000
Class
Class B Common Stock, without par value 7,359,667 shares
Class Outstanding at October 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
EDUTREK INTERNATIONAL, INC.
FORM 10-Q INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 20
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 21
</TABLE>
<PAGE>
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the
Company from time to time in filings with the Securities and Exchange
Commission or otherwise. The words "believe," "plan," "expect," "anticipate,"
"project," and similar expressions identify forward-looking statements, which
speak only as of the date the statement was made. Such forward-looking
statements are within the meaning of that term in Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such statements include, but are not limited to, projections
of revenues, income or loss, cash flows, expenses, capital expenditures, plans
for future operations, including current acquisition discussions, financing
needs or plans, the impact of inflation, and plans relating to products or
services of the Company, as well as assumptions relating to the foregoing. The
Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events, or
otherwise.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. In addition,
statements in this Quarterly Report, including Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," describe factors, among others, that could contribute
to or cause such differences. Additional factors that could cause actual
results to differ materially from those expressed in such forward-looking
statements include, without limitation, risks inherent in negotiating financing
or change of control transactions, new or revised interpretations of applicable
laws, rules and regulations, failure to maintain or renew required regulatory
approvals, accreditation or state authorizations, failure to obtain the
Southern Association of Colleges and Schools' ("SACS") approval to operate in
new locations, failure to comply with Department of Education or state
financial responsibility standards, changes in student enrollment, and other
factors set forth in the Company's Annual Report on Form 10-K and other reports
or materials filed or to be filed with the Securities and Exchange Commission
(as well as information included in oral statements or other written statements
made or to be made by the Company or its management).
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents......................... $ 4,256 $ 3,061
Accounts receivable--net of allowance of $1,503
and $1,985, respectively......................... 4,089 2,444
Income taxes receivable........................... 473 1,717
Other............................................. 958 1,123
-------- --------
Total current assets............................ 9,776 8,345
Property, plant, and equipment--net of accumulated
depreciation..................................... 18,580 19,414
Goodwill--net of accumulated amortization of
$4,063 and $3,303, respectively.................. 36,597 37,357
Other............................................. 1,287 1,792
-------- --------
$ 66,240 $ 66,908
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable.................................. $ 2,410 $ 4,060
Accrued expenses.................................. 3,809 3,482
Accrued related party transactions................ -- 112
Value-added tax payable........................... 268 445
Unearned revenues................................. 8,855 9,412
Restructure accrual--current...................... 3,014 3,970
Line of credit and short term borrowings.......... 17,439 10,687
Current maturities--capital leases and other...... 2,030 2,197
-------- --------
Total current liabilities....................... 37,825 34,365
Capital leases and other--less current
maturities....................................... 6,011 7,498
Deferred rent..................................... 2,885 2,346
Restructure accrual--long term.................... 750 834
Other liabilities................................. 196 250
-------- --------
Total liabilities............................... 47,667 45,293
SHAREHOLDERS' EQUITY
Common stock, Class A voting, one vote per share,
without par value, 40,000,000 shares authorized,
5,958,502 and 4,485,168 issued and outstanding,
respectively..................................... 39,275 36,737
Common stock, Class B voting, ten votes per share,
without par value, 10,000,000 shares authorized,
7,359,667 issued and outstanding................. 4,973 4,973
Accumulated other comprehensive income (loss)..... (77) (33)
Accumulated deficit............................... (25,598) (20,062)
-------- --------
Total shareholders' equity...................... 18,573 21,615
-------- --------
$ 66,240 $ 66,908
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues.......................................... $12,675 $11,898
Costs and expenses:
Cost of education and facilities..................... 9,605 9,430
Selling and promotional expenses..................... 1,854 2,683
General and administrative expenses.................. 4,462 4,933
Amortization of goodwill............................. 254 252
------- -------
Total costs and expenses........................... 16,175 17,298
------- -------
Income (loss) from operations......................... (3,500) (5,400)
Interest expense...................................... 632 468
Other income--net..................................... -- 4
------- -------
Income (loss) before income taxes and minority
interest............................................. (4,132) (5,864)
Income tax (provision) benefit........................ -- 2,251
------- -------
Income (loss) before minority interest................ (4,132) (3,613)
Minority interest in earnings of American University
in Dubai............................................. 31 (18)
------- -------
Net income (loss)..................................... $(4,101) $(3,631)
======= =======
Earnings (Loss) Per Share:
Basic net income (loss) per share.................... $ (0.34) $ (0.34)
Diluted net income (loss) per share.................. $ (0.34) $ (0.34)
Average shares outstanding............................ 11,915 10,777
Dilutive effect:
Warrants............................................. -- --
Options.............................................. -- --
------- -------
-- --
------- -------
Average shares outstanding assuming dilution.......... 11,915 10,777
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues.......................................... $50,764 $43,936
Costs and expenses:
Cost of education and facilities..................... 30,857 26,223
Selling and promotional expenses..................... 6,927 9,339
General and administrative expenses.................. 14,939 14,423
Amortization of goodwill............................. 760 756
------- -------
Total costs and expenses........................... 53,483 50,741
------- -------
Income (loss) from operations......................... (2,719) (6,805)
Interest expense...................................... 1,671 1,085
Other income--net..................................... 28 88
------- -------
Income (loss) before income taxes and minority
interest............................................. (4,362) (7,802)
Income tax (provision) benefit........................ -- 3,296
------- -------
Income (loss) before minority interest................ (4,362) (4,506)
Minority interest in earnings of American University
in Dubai............................................. (1,174) (1,196)
------- -------
Net income (loss)..................................... $(5,536) $(5,702)
======= =======
Earnings (Loss) Per Share:
Basic net income (loss) per share.................... $ (0.46) $ (0.53)
Diluted net income (loss) per share.................. $ (0.46) $ (0.53)
Average shares outstanding............................ 11,909 10,727
Dilutive effect:
Warrants............................................. -- --
Options.............................................. -- --
------- -------
-- --
------- -------
Average shares outstanding assuming dilution.......... 11,909 10,727
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................... $(5,536) $(5,702)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization....................... 3,739 2,772
Bad debt expense.................................... 442 726
Increase (decrease) in restructuring................ (1,040) --
(Increase) decrease in accounts receivable.......... (2,086) (615)
(Increase) decrease in income taxes receivable and
deferred taxes..................................... 1,244 (3,154)
Increase (decrease) in accounts payable and accrued
liabilities........................................ (1,435) 728
Increase (decrease) in unearned revenues............ (557) 279
Increase (decrease) in value-added taxes payable.... (177) (70)
Other............................................... 656 461
------- -------
Net cash provided by (used in) operating
activities....................................... (4,750) (4,575)
------- -------
INVESTING ACTIVITIES
Additions to curriculum development costs............. (200) (879)
Purchases of property, plant, and equipment........... (1,455) (2,589)
------- -------
Net cash used in investing activities............. (1,655) (3,468)
------- -------
FINANCING ACTIVITIES
Borrrowings--net...................................... 7,051 10,425
Proceeds from issuance of common stock................ 2,538 --
Principal payments under capital lease obligations.... (1,679) (1,076)
Principal repayments on long-term debt................ (299) (340)
Other................................................. 27 89
------- -------
Net cash provided by (used in) financing
activities....................................... 7,638 9,098
------- -------
Effect of exchange rate changes on cash............... (38) (27)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. $ 1,195 $ 1,028
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 3,061 2,779
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 4,256 $ 3,807
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................ $ 1,527 $ 1,018
Income taxes........................................ $ 230 $ --
Non-cash investing activities:
Acquisition of property through capital leases...... $ 11 $ 3,108
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Stockholders' Comprehensive Accumulated
Predecessor Common Stock Paid-In Capital Notes Income Deficit Total
----------- ------------ --------------- ------------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance--May 31, 1996... $ 1 $477 $(4,559) $102 $(3,309) $ (7,288)
Distribution to
shareholders........... (1,890) (1,890)
Capital contributed by
stockholder............ 1,239 1,239
Comprehensive loss:
Net loss............... (1,305) (1,305)
Foreign currency
translation........... (18) (18)
--------
Total comprehensive
loss.................. (1,323)
Notes receivable and
advances from
shareholders........... (1,016) (1,016)
--- ---- ------- ---- ------- --------
Balance--October 8,
1996................... $ 1 $477 $(5,575) $ 84 $(5,265) $(10,278)
=== ==== ======= ==== ======= ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Common Stock--
Number of Accumulated Retained
Shares Common Stock Common Other Earnings
--------------- --------------- Stock Comprehensive (Accumulated
Company Class A Class B Class A Class B Warrants Income (loss) Deficit) Total
------- ------- ------- ------- ------- -------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock--July 1, 1996.... 2,240 $1,000 $ 1,000
Issuance of common stock
in connection with the
acquisition of EduTrek
Systems, Inc........... 105 1,995 $ (237) (237)
Sale of common stock in
connection with
acquisition of
Predecessor............ 2,100 3,000 3,000
Issuance of common stock
in exchange for certain
fees................... 350 $ 500 500
Issuance of warrants in
connection with
acquisition of
Predecessor............ $677 677
Issuance of common stock
in exchange for stock
of Predecessor......... 210 787 787
Comprehensive income:
Foreign currency
translation........... $147 147
Net income............. 2,003 2,003
-------
Total comprehensive
income................ 2,150
----- ----- ------- ------ ---- ---- -------- -------
Balance--May 31, 1997... 665 6,335 1,287 4,000 677 147 1,766 7,877
Issuance of common stock
net of initial public
offering costs--
September 29, 1997..... 2,733 34,560 34,560
Conversion of warrants
to common stock........ 879 677 (677) --
Conversion of Class B
Common Stock to Class A
Common Stock........... 42 (42) 27 (27) --
Issuance of common stock
under stock option
plan................... 16 13 13
Comprehensive income:
Foreign currency
translation........... (59) (59)
Net income............. 1,903 1,903
-------
Total comprehensive
income................ 1,844
----- ----- ------- ------ ---- ---- -------- -------
Balance--May 31, 1998... 4,335 6,293 36,564 3,973 -- 88 3,669 44,294
Issuance of common stock
under stock option
plan................... 28 47 47
Comprehensive loss:
Foreign currency
translation........... (64) (64)
Net loss............... (5,516) (5,516)
-------
Total comprehensive
loss.................. (5,580)
----- ----- ------- ------ ---- ---- -------- -------
Balance--December 31,
1998................... 4,363 6,293 36,611 3,973 -- 24 (1,847) 38,761
Issuance of common stock
under stock option
plan................... 81 93 93
Issuance of common stock
under the Employee
Stock Purchase Plan.... 41 33 33
Issuance of Class B
common stock in
exchange for Steve
Bostic convertible
debt................... 1,067 1,000 1,000
Comprehensive loss:..... --
Foreign currency
translation........... (57) (57)
Net loss............... (18,215) (18,215)
-------
Total comprehensive
loss.................. (18,272)
----- ----- ------- ------ ---- ---- -------- -------
Balance -- December 31,
1999................... 4,485 7,360 36,737 4,973 -- (33) (20,062) 21,615
Issuance of common stock
under stock option
plan................... 1 1 1
Issuance of common stock
under the Employee
Stock Purchase Plan.... --
Comprehensive loss:..... --
Foreign currency
translation........... (4) (4)
Net income............. 517 517
-------
Total comprehensive
income................ 513
----- ----- ------- ------ ---- ---- -------- -------
Balance -- March 31,
2000................... 4,486 7,360 36,738 4,973 $-- (37) (19,545) 22,129
Issuance of common stock
under stock option
plan................... 65 2 2
Issuance of common stock
under the Employee
Stock Purchase Plan.... -- --
Comprehensive loss:..... --
Foreign currency
translation........... (5) (5)
Net loss............... (1,952) (1,952)
-------
Total comprehensive
loss.................. (1,957)
----- ----- ------- ------ ---- ---- -------- -------
Balance -- June 30,
2000................... 4,551 7,360 36,740 4,973 $-- (42) (21,497) 20,174
Issuance of common stock
under stock option
plan................... 2 2 2
Issuance of common stock
under the Employee
Stock Purchase Plan.... 27 33 33
Issuance of new common
stock shares........... 1,379 2,500 2,500
Comprehensive loss:..... --
Foreign currency
translation........... (35) (35)
Net loss............... (4,101) (4,101)
-------
Total comprehensive
loss.................. (4,136)
----- ----- ------- ------ ---- ---- -------- -------
Balance -- September 30,
2000................... 5,959 7,360 39,275 4,973 $-- $(77) $(25,598) $18,573
===== ===== ======= ====== ==== ==== ======== =======
</TABLE>
See notes to consolidated financial statement
8
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1--Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for complete financial statements. These unaudited financial
statements include all adjustments, consisting of only normal, recurring
accruals, which EduTrek International, Inc. (the "Company") considers necessary
for a fair presentation of the financial position and the results of operations
for these periods.
The results of operations for the three and nine months ended September 30,
2000 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2000. For further information, refer to the Company's
consolidated financial statements and notes thereto for the quarters ended
March 31, 2000, June 30, 2000 included in the Quarterly Reports on Form 10-Q,
and the fiscal year ended December 31, 1999 included in the Annual Report on
Form 10-K all items as filed with the Securities and Exchange Commission.
New Accounting Pronouncements--In December, 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB No. 101"). SAB No. 101, as amended by
SAB No. 101B, is effective for the fourth quarter of fiscal years beginning
after December 15, 1999. This statement provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
Commission. The Company will adopt SAB No. 101 for the fourth quarter ended
December 31, 2000. The adoption of SAB No. 101 is not expected to have a
significant impact on its financial position or results of operations.
Note 2--U.S. and Foreign Operations
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments and related information in
financial statements. SFAS No. 131 uses the management approach for determining
what operating segment information to report. The management approach is based
on the way that management organizes the operating segments within the Company
for making decisions and assessing performance. The Company operates solely in
the education industry, and management makes decisions and assesses performance
based on the geographic locations of its campuses. Therefore, the Company has
elected to report segment information based on geographic areas.
9
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's operations are located in the United States, the United
Kingdom, and Dubai, United Arab Emirates. Net revenues and income (loss) from
operations by geographic area for the three and nine months ended September 30,
2000 and 1999 and identifiable assets by geographic area at September 30, 2000
and December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended September
September 30, 30,
-------------------------- ----------------
2000 1999 2000 1999
------------- ------------ ------- -------
<S> <C> <C> <C> <C>
Net revenues:
United States................... $10,021 $ 9,221 $35,450 $28,939
United Kingdom.................. 1,890 1,917 10,273 10,327
Dubai, UAE...................... 764 760 5,041 4,670
------- ------- ------- -------
Total......................... $12,675 $11,898 $50,764 $43,936
======= ======= ======= =======
Income (loss) from operations:
United States................... $ (889) $(2,240) $ 648 $(2,041)
United Kingdom.................. (84) (375) 3,053 2,928
Dubai, UAE...................... 5 31 1,794 1,847
Home Office..................... (2,532) (2,816) (8,214) (9,539)
------- ------- ------- -------
Total......................... $(3,500) $(5,400) $(2,719) $(6,805)
======= ======= ======= =======
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C> <C> <C>
Identifiable assets:
United States................... $60,493 $62,248
United Kingdom.................. 2,176 2,302
Dubai, UAE...................... 3,571 2,358
------- -------
Total......................... $66,240 $66,908
======= =======
</TABLE>
Note 3--Line of Credit and Short Term Borrowings
The Company finances its operating activities and capital requirements,
including debt repayment, principally from cash provided by operating
activities and borrowings under bank facilities. In addition, on May 30, 2000,
the Company received a cash infusion in the form of a short-term loan from a
third party.
Bank Facilities--Line of Credit:
The Company has a $10 million revolving line of credit ("Line A") and a
$4.35 million revolving line of credit ("Line B") with a bank (collectively, as
amended, the "Credit Agreement"). The Credit Agreement is secured by
substantially all of the Company's assets.
Line A, as amended, matures on the earlier of April 30, 2001, or 30 days
after demand for payment by the bank. Amounts outstanding under Line A bear
interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%. At November
6, 2000, the Company had outstanding borrowings under Line A of $8,088,640. In
addition, the Company had issued $2,006,194 in letters of credit against Line
A. These letters of credit are required as security under building leases in
Los Angeles, Washington, D.C., and Miami.
10
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Line B, as amended, matures on November 30, 2000. Line B amounts outstanding
bear interest at the Prime rate plus 2.00%. At November 6, 2000, the Company
had outstanding borrowings under Line B of $4,350,000.
On May 30, 2000, the Company executed an amendment to the Credit Agreement,
pursuant to which all previous arrangement fees under the Credit Agreement were
consolidated into one fixed arrangement fee of $1,150,000. This fee is payable
on the later of 1) that date which is (30) days after the lender makes demand
for payment, 2) the date of the retirement of amounts outstanding under the
Credit Agreement, or 3) April 30, 2001. The first $250,000 of this fixed
arrangement fee was charged to operations in 1999. From January 1, 2000 through
September 30, 2000, $474,215 was charged to operations. The remaining $425,785
is being charged to operations at the rate of $60,827 per month through April
30, 2001.
On September 11, 2000, the Company executed an additional amendment to the
Credit Agreement, which among other things, provided for the waiver of
noncompliance with certain debt covenants through November 30, 2000. In
consideration of the lender entering into this amendment, the Company agreed to
cause a $2.5 million cash equity infusion to be made to the Company on or
before September 15, 2000 and to pay an additional fixed arrangement fee of
$250,000. Such additional fee is payable on the Line B termination date unless
the Company either a) pays the Line B obligations (including all previously
agreed upon arrangement fees) in full on or before November 30, 2000, or b) the
obligations are refinanced in full on or before November 30, 2000 at the sole
discretion of the lender.
The Credit Agreement requires interest only payments until maturity. The
Company has made all required interest payments through November 6, 2000. On
October 24, 2000, the Company signed an Agreement and Plan of Merger (the
"Merger Agreement"), which provides for the acquisition of the Company by
Career Education Corporation ("CEC"). See Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent
Developments." The Company anticipates that the merger will be consummated in
January 2001, although there can be no assurance of such.
Short Term Borrowings:
On May 30, 2000, the Company entered into a letter of intent with a
different party providing for the sale of certain assets of the Company's
Global Studies Business for $27 million. In addition, with the execution of the
letter of intent, the Company borrowed $5,000,000 from this third party to
assist in funding its short-term working capital requirements. On August 7,
2000, most of the operative provisions of the letter of intent expired without
the parties reaching a definitive agreement for the contemplated sale of
assets, primarily due to the parties' anticipated inability to obtain required
regulatory approvals in a timely manner. Certain provisions of the letter of
intent, however, continue in effect. In particular, (1) if certain assets of
the Company's Global Studies Business are sold to a third party on or before
December 31, 2000, then the Company will pay the third party one-half of the
amount, if any, by which the purchase price exceeds $27,000,000, and (2) if the
Company's Global Studies Business is included in any sale of the Company or its
affiliates, in a transaction that incorporates more than just the Global
Studies Business, then the Company will pay the third party $500,000.
Management expects consummation of the CEC merger in January 2001, and
therefore no accrual for the $500,000 has been made to the consolidated
financial statements of the Company for the nine months ended September 30,
2000.
On May 30, 2000, the Company received a $5,000,000 short-term loan from a
third party to finance the short-term working capital needs of the Company. The
loan, which matures on November 30, 2000, stipulates that the proceeds cannot
be used to repay or prepay amounts owed under the Credit Agreement. The loan
bears interest at the Prime Rate, and interest is due quarterly. At November 6,
2000, the Company had outstanding
11
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
borrowings under this loan of $5,000,000. As of November 6, 2000, all interest
payments are current. The loan is secured by substantially all of the Company's
assets, on an equal basis with loans under the Credit Agreement. Without
consummation of the merger and, if necessary, negotiating for debt retirement
if the closing of the merger is after November 30, 2000, the ability of the
Company to make the required payments of principal on this loan is in doubt.
Pursuant to the Merger Agreement, CEC will provide financial assistance, or
guarantees, for up to $5.0 million to the Company to satisfy obligations of the
Company to the third party, with respect to the short-term loan, provided that
such assistance or guarantees are accompanied by a first lien on the assets of
the Company and its subsidiaries.
Note 4--Private Placement of Class A Common Shares
On September 11, 2000, four individuals, (including Steve Bostic, the
Company's Chairman and Chief Executive Officer) purchased an aggregate of
1,379,311 Class A common shares at $1.81 per share (the closing price on the
day of sale) providing proceeds to the Company of $2.5 million. The proceeds
were used to fund short-term working capital needs. In addition to the Class A
common shares purchased, each investor acquired the right to purchase, under
certain circumstances, beginning April 1, 2001, an additional 0.3333 share of
Class A common stock for each share acquired on September 11, 2000. The warrant
to purchase additional shares is only exercisable (at $1.81 per share) on a pro
rata basis to the extent that the investor has shares outstanding at the time
of exercise.
Note 5--Related Party Transactions
Three members of the family of the Company's Chairman and Chief Executive
Officer terminated their employment with EduTrek International, Inc. during the
three months ended June 30, 1999. Termination payments of approximately
$247,000 were accrued in June 1999 with payments scheduled through May 2000. As
of September 30, 2000, all termination payments for related parties have been
paid. One member of the family was rehired effective May 1, 2000; compensation
payments began upon expiration of the previously discussed termination
agreement.
On September 11, 2000, R. Steven Bostic, the Company's Chairman and Chief
Executive Officer, purchased 459,772 shares of Class A common stock for a total
purchase price of $833,336.75. In addition, Mr. Bostic acquired a warrant to
purchase, under certain circumstances, beginning April 1, 2001, an additional
153,257 shares of Class A Common Stock. This investment was part of a private
placement of 1,379,311 Class A common shares to a total of four investors,
which generated total proceeds of $2.5 million. The purpose of the private
placement was to provide short-term working capital.
Note 6--Company Restructuring Activities
In December 1999, the Company's executive officers and Board of Directors
implemented procedures to restructure the Company in three different areas in
order to reduce overall expenditures and restore positive cash flow of the
Company. The three areas of restructure were: 1) reduction of corporate
overhead through elimination and consolidation of positions and space
reductions, 2) the teach-out of current classes in the Washington D.C. campus
and closure of the operation, and 3) termination of the lease for the current
Northern Virginia campus site (operations never commenced in Northern
Virginia), with plans for a new Northern Virginia site yet to be finalized. As
a result, the Company established restructuring accruals at December 31, 1999
totaling $4.8 million. The accrual for severance and employment contracts
included 16 employees. Revenue and loss from operations of the Washington D.C.
campus were $2,527,452 and ($2,075,102), respectively, for the year ended
December 31, 1999, and $216,284 and ($704,000), respectively, for the seven
months ended December 31, 1998 (the campus began operations in October 1998).
The following table shows the components of the restructure accrual, and
restructuring activities through September 30, 2000:
12
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restructure Schedule
<TABLE>
<CAPTION>
Payments
Original Through Balance at
Accrual September 30, September 30,
Accural Category Amount 2000 2000
---------------- ---------- ------------- -------------
<S> <C> <C> <C>
Lease Termination and other related
costs................................. $4,137,135 $680,385 $3,456,750
Severance and employment contracts, and
other related costs................... $ 666,340 $358,583 $ 307,757
</TABLE>
Note 7--Going Concern
The consolidated financial statements for the fiscal year ended December 31,
1999 were prepared assuming the Company would continue as a going concern. The
Company had reported net losses of $18.2 million for the year ended December
31, 1999 and $5.5 million for the seven-month transition period ended December
31, 1998 (following a change in fiscal year end). The Company is highly
leveraged and recent developments have had a material adverse effect on the
Company's short-term liquidity and ability to service its debts. As of
September 30, 2000, the Company had $8.1 million of debt outstanding under Line
A of the Credit Agreement, which matures at the earlier of April 30, 2001, or
30 days after the demand of the lender. Additionally, there are $2.0 million of
letters of credit issued on behalf of the Company. The Company has an
additional $4.35 million outstanding under Line B of the Credit Agreement,
which has a maturity date of November 30, 2000.
On May 30, 2000, the Company received a $5,000,000 short-term loan from a
third party to finance the short-term working capital needs of the Company and
for general corporate purposes. The loan, which matures on November 30, 2000,
stipulates that the proceeds cannot be used to repay or prepay amounts owed
under the Credit Agreement.
If the Company does not make the required debt payments on November 30,
2000, or April 30, 2001, it may be unable to continue its normal operations,
except to the extent permitted by its lenders. Substantially all of the
Company's assets are pledged as collateral under the Credit Agreement and the
short-term loan.
Based upon management's current projected earnings and cash flow of the
Company, without some form of additional capital infusion, whether pursuant to
the CEC merger, strategic investment in the Company, a refinancing of the
Company's debt, or a combination thereof, management does not believe it will
have the financial resources to make the required debt payments under the
Credit Agreement or the third party short-term loan, when due. As a result, the
Company retained The Robinson-Humphrey Company LLC ("Robinson-Humphrey") to
assist in determining short-term and long-term financial requirements and to
evaluate potential refinancing and restructuring alternatives. On October 24,
2000, the Company signed the Merger Agreement, which provides for the
acquisition of the Company by CEC. Management believes that the consummation of
this merger will restore the ability of the Company to finance its operating
activities and capital requirements, including debt repayment.
In addition, the Company did not meet the financial responsibility standards
of the U.S. Department of Education as of December 31, 1999. As a result, the
Company could be required to post a letter of credit of up to $15 million with
the Department of Education, although no such requirement has been communicated
by the Department of Education as of November 6, 2000. Management believes that
the consummation of the CEC merger will provide the Company with the ability to
correct the financial responsibility deficiencies for the surviving combined
entity, although there can be no assurance of such. Failure to correct the
financial responsibility deficiencies could result in the termination of the
Company as an institution eligible for student Title IV financial aid, which
would severely and negatively affect cash flows of the Company and possibly
result in the Company being unable to continue its normal operations. Without
consummation of the merger,
13
<PAGE>
the Company is currently incapable of posting any letters of credit that might
be required by the Department of Education in the future.
Certain states in which the Company operates have regulatory agencies which
perform their own financial capability reviews based on annual fiscal year
results. These reviews include fiscal responsibility tests, with which the
Company did not comply as of December 31, 1999. Management believes that by
successfully addressing the financial responsibility standards of the U.S.
Department of Education, it will meet the financial requirements of all the
states in which it operates, although there can be no assurance of such. With
consummation of the merger, management believes that the surviving entity will
meet the financial capability requirements of all the states in which the
Company currently operates, although there can be no assurance of such.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements for the
three and nine months ended September 30, 2000, and the fiscal year ended
December 31, 1999, did not include any adjustments that might result from the
outcome of this uncertainty.
Should the merger with CEC not be consummated, the Company would need to
raise sufficient capital through debt or equity to meet its liquidity
requirements. Such requirements include financing its current operating
activities and capital requirements, including debt repayment, and meeting the
financial responsibility standards of the U.S. Department of Education and the
states in which the company operates. There can be no assurance that the
Company would be successful in obtaining the necessary capital to carry on its
business, should the merger not be consummated.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Recent Developments
On October 24, 2000, the Company entered into an Agreement and Plan of
Merger ("the Merger Agreement"), which provides for the acquisition of the
Company by Career Education Corporation, a Delaware corporation ("CEC") through
the merger of a wholly owned subsidiary of CEC with and into the Company. Under
the terms of the Merger Agreement, at the effective time of the merger, each
outstanding share of the Company's Common Stock will be converted into the
right to receive (i) 0.0901 of a share of CEC common stock and (ii) $0.1877 in
cash.
The merger is expected to be consummated in early January of 2001. There can
be no assurance, however, that such transaction will ultimately be consummated.
Based on its current estimates of cash flow, management believes that absent
some form of additional capital infusion or restructuring, whether pursuant to
the CEC merger, strategic investment in the Company, refinancing or extension
of the Company's debt, or a combination thereof, by the end of November 2000,
the Company will not have sufficient cash resources to make required debt
payments.
Results of Operations
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the consolidated
financial statements and notes thereto for the three and nine months ended
September 30, 2000 included in Item 1 of this report, the "Selected
Consolidated Financial Data" and the Company's consolidated financial
statements and notes thereto for the fiscal year ended December 31, 1999
included in the Company's Annual Report on Form 10-K, the 7 month transition
period from June 1, 1998 to December 31, 1998 included in the Company's
Transition Report on Form 10-K, as well as in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 1998. Unless
otherwise specified, any reference to a "fiscal year" is to a fiscal year ended
December 31.
14
<PAGE>
The following table sets forth, for the periods indicated, the percentage
relationship of certain statement of operations items to net revenues for the
Company:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues.................................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of education and facilities............ 75.8% 79.3% 60.8% 59.7%
Selling and promotional expenses............ 14.6% 22.6% 13.6% 21.3%
General and administrative expenses......... 35.2% 41.5% 29.4% 32.8%
Amortization of goodwill.................... 2.0% 2.1% 1.5% 1.7%
------ ------ ------ ------
Total costs and expenses.................. 127.6% 145.4% 105.4% 115.5%
------ ------ ------ ------
Income (loss) from operations................. -27.6% -45.4% -5.4% -15.5%
Interest expense.............................. 5.0% 3.9% 3.3% 2.5%
Other income--net............................. 0.0% 0.0% 0.1% 0.2%
------ ------ ------ ------
Income (loss) before income taxes and minority
interest..................................... -32.6% -49.3% -8.6% -17.8%
Income tax (provision) benefit................ 0.0% 18.9% 0.0% 7.5%
------ ------ ------ ------
Income (loss) before minority interest........ -32.6% -30.4% -8.6% -10.3%
Minority interest in earnings of American
University in Dubai.......................... 0.2% -0.2% -2.3% -2.7%
------ ------ ------ ------
Net income (loss)............................. -32.4% -30.5% -10.9% -13.0%
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net Revenues. Net revenues increased approximately $777,000 or 6.5%. The
increase was due to an increase in student enrollment primarily at the four
Power Campuses and a tuition increase for both Traditional and Power Campuses.
Cost of Education and Facilities. Cost of education and facilities increased
approximately $175,000 or 1.9%. Of this amount, education costs increased
approximately $490,000 or 8.3% due to an increase in the number of faculty
supporting the Power Campuses in conjunction with the campuses' enrollment
growth, as well as the related courseware, computer and other education costs.
Facility costs decreased approximately $315,000 or 8.8%. Facility costs for the
1999 period included a one time incremental rent expense, charged to
operations, to adjust the straight-line rent calculations for the new Power
Campus locations. Facility costs for the 2000 period include costs associated
with space growth in conjunction with the Power Campuses enrollment growth. For
the reasons set forth above, cost of education and facilities decreased as a
percentage of net revenues to 75.8% in the 2000 period from 79.3% in the 1999
period.
Selling and Promotional Expenses. Selling and promotional expenses decreased
approximately $829,000 or 30.9%. The decrease was a direct result of the cost
control efforts instituted by the Company and the more focused marketing
initiatives for both the Traditional and Power Campuses. As a percentage of net
revenues, selling and promotional expenses decreased to 14.6% in the 2000
period from 22.6% in the 1999 period.
General and Administrative Expenses. General and administrative expenses
decreased approximately $471,000 or 9.5%. The reduction was the result of the
Company's restructuring efforts, which began in December 1999. The decrease was
partially offset by the effects of higher banking charges incurred for the
liquidity challenges faced by the Company in the 2000 period. Corporate general
and administrative expenses for the 2000 period include $183,000 of
restructuring charges related to the pursuit of strategic options including the
merger with CEC described in "Recent Developments." As a percentage of net
revenues, general and administrative expenses decreased to 35.2% in the 2000
period from 41.5% in the 1999 period.
15
<PAGE>
Amortization of Goodwill. Goodwill amortization of $254,000 and $252,000 for
the 2000 and 1999 periods respectively, was the result of the October 1996
acquisition of American European Corporation and Subsidiaries with goodwill
costs being amortized over a 40-year period.
Interest Expense. Interest expense increased approximately $164,000 or 35.0%
as a result of increased borrowing costs under the Company's revolving line of
credit due to an increase in interest rates, and the interest incurred on the
$5.0 million short-term loan, dated May 30, 2000.
Other Income--Net. Other income--net decreased approximately $4,000.
Income Tax (Provision) Benefit. The Company generated a pretax loss for the
three months ended September 30, 2000, which generated a deferred tax benefit.
However, management believes the recoverability of the Company's current and
prior year's unused deferred tax asset is uncertain due to the recent losses
and therefore is recognizing no tax benefit in the current quarter.
Minority Interest in Earnings of American University in Dubai. Minority
interest in earnings increased approximately $49,000 due to an increase in
operating income at the Dubai campus.
Net Income (loss). For the reasons set forth above, the Company experienced
a net loss of approximately $4.1 million, or $.34 per share, for the 2000
period compared to a net loss of approximately $3.6 million, or $.34 per share,
for the 1999 period. On a pre-tax basis, income before income taxes and
minority interest improved from a loss of $5.9 million for the 1999 three-month
period to a loss of $4.1 million for the 2000 three-month period.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
Net Revenues. Net revenues increased approximately $6.8 million or 15.5%.
The increase was due to an increase in student enrollment primarily at the four
Power Campuses and a tuition increase for both Traditional and Power Campuses.
Cost of Education and Facilities. Cost of education and facilities increased
approximately $4.6 million or 17.7%. Of this amount, education costs increased
approximately $3.3 million or 18.9% due to an increase in the number of faculty
supporting the Power Campuses in conjunction with the campuses' enrollment
growth, as well as the related courseware, computer and other education costs.
Royalty expense decreased approximately $199,000 due to the termination of the
ITI courseware licensing agreement in 1998, which impacted the 1999 period.
Facility costs increased approximately $1.6 million or 17.6% as the result of
space growth in conjunction with the Power Campuses enrollment growth, as well
as the cost of maintaining dual sites for some locations during the transition
to larger or more accommodating locations. For the reasons set forth above,
cost of education and facilities increased as a percentage of net revenues to
60.8% in the 2000 period from 59.7% in the 1999 period.
Selling and Promotional Expenses. Selling and promotional expenses decreased
approximately $2.4 million or 25.8%. The decrease was a direct result of the
cost control efforts instituted by the Company and the more focused marketing
initiatives for both the Traditional and Power Campuses. As a percentage of net
revenues, selling and promotional expenses decreased to 13.6% in the 2000
period from 21.3% in the 1999 period.
General and Administrative Expenses. General and administrative expenses
increased approximately $516,000 or 3.6%. As a percentage of net revenues,
however, general and administrative expenses decreased to 29.4% in the 2000
period from 32.8% in the 1999 period. The dollar increase was primarily due to
additions throughout 1999 of personnel at the new Power Campuses and the home
office to support the Company's
growth, partially offset by the restructuring efforts which began in December
1999. The increase also reflects the effects of higher banking charges incurred
for the liquidity challenges faced by the Company in the 2000
period. With respect to the allowance for doubtful accounts, approximately
$920,000 of uncollectible student
16
<PAGE>
receivables was written-off against the allowance for doubtful accounts for the
nine months ended September 30, 2000. There was no corresponding write-off in
the 1999 period. Corporate general and administrative expenses for the nine-
month 2000 period include $344,000 of restructuring charges related to the
pursuit of strategic options, including the merger with CEC described in
"Recent Developments."
Amortization of Goodwill. Goodwill amortization of $760,000 and $756,000 for
the 2000 and 1999 periods respectively, was the result of the October 1996
acquisition of American European Corporation and Subsidiaries with goodwill
costs being amortized over a 40-year period.
Interest Expense. Interest expense increased approximately $586,000 or 54.0%
as a result of increased outstanding borrowings under the Company's revolving
line of credit, and the interest incurred on the $5.0 million short-term loan,
dated May 30, 2000.
Other Income--Net. Other income--net decreased approximately $60,000 or
68.2%.
Income Tax (Provision) Benefit. The Company generated a pretax loss for the
nine months ended September 30, 2000, which generated a deferred tax benefit.
However, management believes the recoverability of the Company's current and
prior year's unused deferred tax asset is uncertain due to the recent losses
and therefore is recognizing no tax benefit for the first three fiscal quarters
combined.
Minority Interest in Earnings of American University in Dubai. Minority
interest in earnings increased approximately $22,000 or 1.8% due to an increase
in operating income at the Dubai campus.
Net Income (Loss). For the reasons set forth above, the Company experienced
a net loss of approximately $5.5 million or $.46 per share for the 2000 period
compared to a net loss of approximately $5.7 million or $.53 per share for the
1999 period. On a pre-tax basis, income before income taxes and minority
interest improved from a loss of $7.8 million for the 1999 nine-month period to
a loss of $4.4 million for the 2000 nine-month period.
Seasonality
The Company experiences seasonality in its results of operations primarily
as a result of changes in the level of student enrollments. While the Company
enrolls students throughout the year, the second and third fiscal quarter
revenues are lower than the first and fourth fiscal quarters, and the second
and third fiscal quarter costs and expenses are higher as a percentage of net
revenues than the first and fourth fiscal quarters. This seasonality is
partially mitigated by technology education programs, which are offered
throughout the year, at Power Campuses in California, Georgia, Florida, and the
District of Columbia.
Liquidity and Capital Resources
The Company finances its operating activities and capital requirements,
including debt repayment, principally from cash provided by operating
activities and borrowings under bank facilities. In addition, on May 30, 2000,
the Company received a cash infusion in the form of a short-term loan from a
third party. On September 11, 2000, the Company received an additional cash
infusion from a private placement of Class A common stock.
The Company has a $10 million revolving line of credit ("Line A") and a
$4.35 million revolving line of credit ("Line B") with a bank (collectively, as
amended, the "Credit Agreement"). The Credit Agreement is secured by
substantially all of the Company's assets.
Line A, as amended, matures on the earlier of April 30, 2001, or 30 days
after demand for payment by the bank. Amounts outstanding under Line A bear
interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%. At November
6, 2000, the Company had outstanding borrowings under Line A of $8,088,640. In
addition, the Company had issued $2,006,194 in letters of credit against Line
A. These letters of credit are required as security under building leases in
Los Angeles, Washington, D.C., and Miami.
17
<PAGE>
Line B, as amended, matures on November 30, 2000. Line B amounts outstanding
bear interest at the Prime rate plus 2.00%. At November 6, 2000, the Company
had outstanding borrowings under Line B of $4,350,000.
On May 30, 2000, the Company executed an amendment to the Credit Agreement,
pursuant to which all previous arrangement fees under the Credit Agreement were
consolidated into one fixed arrangement fee of $1,150,000. This fee is payable
on the later of (1) 30 days after the lender makes demand for payment, (2) the
retirement of all amounts outstanding under the Credit Agreement, or (3) April
30, 2001. The first $250,000 of this fixed arrangement fee was charged to
operations in 1999. From January 1, 2000 through September 30, 2000, $474,215
was charged to operations. The remaining $425,785 is being charged to
operations at the rate of $60,827 per month through April 30, 2001.
On September 11, 2000, the Company executed an additional amendment to the
Credit Agreement, which among other things provided for the waiver of
noncompliance with certain debt covenants through November 30, 2000. In
consideration of the lender entering into this amendment, the Company agreed to
cause a $2.5 million cash equity infusion to be made to the Company on or
before September 15, 2000 and to pay an additional fixed arrangement fee of
$250,000. Such additional fee is payable on the Line B termination date unless
the Company either a) pays all of the obligations (including all previously
agreed upon arrangement fees) in full on or before November 30, 2000, or b) the
obligations are refinanced in full on or before November 30, 2000 at the sole
discretion of the lender.
The Credit Agreement requires interest only payments until maturity. While
the Company has made all required interest payments through November 6, 2000,
based on management's current projected earnings and cash flow, without some
form of additional capital infusion or restructuring, whether pursuant to the
CEC merger or otherwise, the Company does not believe it will be able to make
future required payments of principal and interest on a timely basis.
On May 30, 2000, the Company received a $5,000,000 short-term loan from a
third party to finance the short-term working capital needs of the Company. The
loan, which matures on November 30, 2000, stipulates that the proceeds cannot
be used to repay or prepay amounts owed under the Credit Agreement. Amounts
outstanding under the loan bear interest at the Prime rate, and interest is due
quarterly. At November 6, 2000, the Company had outstanding borrowings under
the loan of $5,000,000. The loan is secured by substantially all of the
Company's assets, on an equal basis with loans under the Credit Agreement.
The Company is negotiating with the lenders under both the Credit Facility
and the short-term loan to extend the maturities of debt due November 30, 2000,
in the event the CEC merger is not consummated by such date. The Company is
also negotiating with the bank to extend, if necessary, the waiver of certain
debt covenants beyond November 30, 2000. The Company believes that such
negotiations will be successful, although there can be no assurance of such.
Should the CEC merger not be consummated by November 30, 2000, and should the
negotiations described above fail to facilitate a later maturity date, then the
Company will not be able to make the required principal payments.
In addition, pursuant to the original letter of intent with the short-term
lender, if the CEC merger is consummated before December 31, 2000, a $500,000
fee will be due to such lender. However, management expects consummation of the
CEC merger in January 2001 and therefore no provision has been made.
On September 11, 2000, four individuals, (including Steve Bostic, the
Company's Chairman and Chief Executive Officer) purchased an aggregate of
1,379,311 Class A common shares at $1.81 per share (the closing price on the
day of sale) providing proceeds to the Company of $2.5 million. The proceeds
were used to fund short-term working capital needs. In addition to the Class A
common shares purchased, each investor acquired the right to purchase, under
certain circumstances, beginning April 1, 2001, an additional 0.3333 share of
common stock for each share acquired on September 11, 2000. The warrant to
purchase additional shares is only exercisable on a pro rata basis to the
extent that the investor has shares outstanding at the time of exercise.
18
<PAGE>
The Department of Education requires that Title IV program funds collected
by an institution for unbilled tuition be kept in separate cash or cash
equivalent accounts until the students are billed for the portion of their
program related to these funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate cash
account until certain conditions are satisfied. As of September 30, 2000, the
Company had approximately $119,600 in these separate accounts to comply with
these requirements. These funds generally remain in these separate accounts for
an average of 3-14 days from the date of collection. These restrictions on cash
have not affected the Company's ability to fund daily operations.
All institutions participating in Title IV programs must satisfy specific
standards of financial responsibility. Institutions are evaluated for
compliance with those standards annually as each institution submits its
audited financial statements to the Department of Education. The standards
consist of an equity ratio, a primary reserve ratio, and a net income ratio. An
institution that is determined by the Department of Education not to meet the
standards is nonetheless entitled to participate in Title IV programs if it can
demonstrate to the Department of Education that it is financially responsible
on an alternative basis. An institution may do so by posting an irrevocable
letter of credit in favor of the Department of Education either in an amount
equal to 50% of the total Title IV program funds received by students enrolled
at such institution during the prior year, or in an amount equal to 10% of such
prior year's funds. Additionally, an institution would agree to disburse those
funds only on a reimbursement basis (as described below).. The Company has now
submitted its audited financial statements with respect to the year ended
December 31, 1999.
As of December 31, 1999, the Company did not meet the financial
responsibility standards of the Department of Education. Approximately 50% of
the Company's revenue is derived from Title IV funds. Failure to post a letter
of credit, or reach some other acceptable agreement with the Department of
Education would result in the termination of the Company as an institution
eligible for Title IV financial aid and would negatively impact future cash
flows of the Company and possibly result in the Company being unable to
continue its normal operations. As of November 6, 2000, no requirement for any
letter of credit has been communicated by the Department of Education to the
Company. The Company has provided the Department of Education certain
information regarding its financial status and the low student loan default
rate. It has requested that the Department of Education consider such
information in connection with its decision to require any surety. The Company
believes that upon consummation of the CEC merger, the surviving consolidated
entity will meet the financial responsibility standards of the Department of
Education. The Company further believes that the Department of Education will
not require any letters of credit, until there has been a reasonable time for
the merger to be consummated, although there can be no assurance of such.
With respect to the Company's not meeting financial responsibility
standards, or if the Company were deemed not to be in compliance with good
administrative practice with respect to financial aid, the Company could be
required to receive Title IV funds from the Department of Education under a
strict form of cash monitoring the reimbursement payment method. Under these
methods, the Company would be required to first make disbursements to eligible
students and parents through credits to the student's accounts before it
requests or receives funds for those disbursements from the Department of
Education. Any requirement that the Company operate under these methods would
result in an approximate 30-80 day delay in the receipt by the Company of
tuition monies under Title IV. Failure to finance the resulting additional
liquidity needs could create material working capital shortages for the
Company, if the Company is required to receive payments from the Department of
Education under the reimbursement method. This liquidity financing could be in
addition to posting of a letter of credit. The Company believes that its
administrative practice with respect to financial aid is in accordance with
acceptable practice.
Certain states in which the Company operates have regulatory agencies which
perform their own financial capability reviews, which include fiscal tests. The
Company is not currently in compliance with some of these state requirements.
Management believes that, by successfully addressing the financial
responsibility standards of the Department of Education, it will meet the
financial requirements of all the states in which it operates, although there
can be no assurance of such. Management believes that upon consummation of the
CEC merger, the surviving consolidated entity will meet the financial
responsibility standards of all the states in which the Company currently
operates, although there can be no assurance of such.
19
<PAGE>
Purchases of property, plant, and equipment for the nine months ended
September 30, 2000 were approximately $1.5 million. These purchases were
primarily for: (1) the completion of the build-out of the Miami campus; (2)
customary hardware and software costs; (3) investments in computer technology
to support the information technology curriculum; and (4) increases in normal
recurring capital expenditures due to the overall increases in student and
employment levels resulting from the Company's growth. For the nine months
ended September 30, 2000, the Company also capitalized curriculum development
costs totaling approximately $200,000. The Company expects to fund capital
expenditures for existing campuses, before the merger through cash from
operations, and after the merger through funds provided by the surviving
consolidated entity. However, there can be no assurance of such.
The Company's ability to fund its working capital and capital expenditure
requirements, implement new programs, make interest and principal payments on
its indebtedness, and meet its other cash requirements, depends on, among other
things, current cash and cash equivalents, internally generated funds, the
proceeds of the Company's Credit Agreement, and other loans. Based on current
estimates of cash flow, the Company does not believe it will have sufficient
cash resources to make required debt payments. Management believes that the
consummation of the CEC merger would make available to the Company sufficient
capital to alleviate the current liquidity crisis, correct the ratio
deficiencies, and also to post any letters of credit, if required, by the
Department of Education. Management expects the CEC merger to be consummated in
early January of 2001. There can be no assurance, however, that such
transaction will ultimately be consummated. Further, management believes that
it will be able to fund its working capital requirements, except for the
principal payments due November 30, 2000, through operations until the date
that the CEC merger is consummated, although there can be no assurance of such.
Impact of Inflation
The Company does not believe its operations have been materially affected by
inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has limited exposure to the impact of interest rates, foreign
currency fluctuations and changes in the market value of its investments.
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PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. No exhibits are required to be filed with this report.
(b) Reports on Form 8-K. During the quarter ended September 30, 2000, the
Company filed one Current Report on Form 8-K (dated September 8, 2000)
reporting certain events under Item 5 of the Form.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Edutrek International, Inc.
/s/ Steve Bostic
Date: November 6, 2000 By: _________________________________
Steve Bostic, President and
Chief Executive Officer
(principal executive officer)
Date: November 6, 2000 /s/ David J. Horn
By: _________________________________
David J. Horn, Chief Financial
Officer
(principal financial and
accounting officer)
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